The periphery is at risk with a hawkish ECB.
Last week’s ECB meeting sent shockwaves to the periphery. The BTPS-Bund spread spiked to 130bps, the highest since November 2020. To cause such a move is the perception that the ECB might not be as accommodative as it has been until now due to strong inflationary pressures. With the PEPP program ending in March next year, sovereigns from the periphery are at risk. Even if a new bond purchasing program is introduced, it might not provide as much support as the PEPP did until now.
The selloff continues this morning, with Italian BTPs recording the biggest losses as Citigroup and Goldman Sachs published research saying that the BTP-Bund spread will continue to widen. It's safe to expect the BTP-Bund spread to remain volatile until December’s ECB meeting. Yet, if yields don't stabilize, it's likely that the central bank will reiterate its commitment to keep financing conditions stable, compressing yields in the periphery once again.
Yet, it's essential not to forget that the German election is still playing in the background. If a traffic light coalition is confirmed, we'll likely see higher yields in the euro area. Yet, in the long term, the BTP-Bund spread will gradually tighten.
This week's it's worthwhile to keep an eye on government bond auctions from Germany, France and Spain to understand whether investors appetite for European sovereigns is changing.